Deutsche Bank Says Selloff In KLX Shares May Be Overdone

The recent selloff in KLX Inc (NASDAQ: KLXI) may be overdone, according to a report from Deutsche Bank.

KLX reported lower-than-expected first quarter results, as the energy business (ESG) was weak during the quarter and the aero business (ASG) was also a bit behind Deutsche Bank's forecast. The disappointing results led to a 17 percent drop in the shares on Monday.

On a GAAP basis, KLX reported $0.12 EPS vs. estimate of $0.33 with ESG accounting for $0.19 of the miss. The Street was at $0.35, but unclear if this was GAAP.

"Given ASG carries most of the franchise value (if not all) and numbers there don't change dramatically, the sell-off appears overdone on the ESG disappointment. That being said, we maintain our Hold given preference for others in the space," analyst Myles Walton wrote in a note.

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Looking Forward

The analyst cut 2016 EPS estimate to $0.93 from $1.42 and segment EBIT view to negative $90 million from negative $50 million.

"We continue to question how the ASG and ESG businesses fit together and whether mgmt will start to consider alternatives to unlock ASG value. Any indication that mgmt's position is changing or an uptick in ASG's aftermarket business would likely gain investor attention," Walton highlighted.

The company still expects low-single digit organic growth on the legacy business with Herndon being additive, though the amount remains unclear as it may prune Herndon's OE business given low profitability.

"We continue to see this as a good deal which could be 10 percent accretive to 2017/18," said Walton, who noted that investors were selling the stock with no obvious second-quarter catalyst.

Shares of KLX rose 3.90 percent to $31.18 in Tuesday's afternoon session. Walton cut the price target on the stock to $37 from $39.